Finance
What is 'cash-out refinancing' and what risks does it pose for Illinois homeowners?
ARefinancing to get a lower interest rate; no risk
BRefinancing for more than the existing mortgage balance to extract equity as cash; increases loan balance and monthly payments, potentially risking negative equity✓ Correct
CPaying off a mortgage with cash from savings; reduces risk
DA type of bridge loan used only in refinancing situations
Explanation
Cash-out refinancing replaces an existing mortgage with a new, larger one, with the borrower receiving the difference in cash. Risks include: higher loan balance and monthly payments, potential negative equity if values decline, resetting the amortization clock, and increased time to build equity.
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Key Terms to Know
Amortization
The gradual repayment of a loan through scheduled periodic payments that cover both principal and interest.
Adjustable-Rate Mortgage (ARM)A mortgage with an interest rate that changes periodically based on a financial index, usually after an initial fixed-rate period.
Debt-to-Income Ratio (DTI)A lender's measure of a borrower's monthly debt obligations relative to their gross monthly income, used to evaluate loan eligibility.
Discount PointsPrepaid interest paid to a lender at closing to reduce the mortgage interest rate, with each point equal to 1% of the loan amount.
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